Efficiency of Decisions under Membership Heterogeneity and Government Regulations: Insights from Farmer Cooperatives in China

Abstract

The Cooperative Law, passed in 2007, aims to support and regulate farmer cooperatives in China. The adoption of its regulations is uneven, with most regulations followed except the one-person, one-vote rule. We model investment decisions of Chinese cooperatives and measure the efficiency of capital allocation under heterogeneous membership and alternative governance policies. We show that relative membership heterogeneity in equity and patronage holdings and a cooperative’s dividend policy are crucial in determining the optimal level of governance centralization. Centralizing the governance to major equity holders and following other regulations reflect a trade-off faced by cooperatives between obtaining financial support from the government and achieving efficient decision-making.